My Maryland Tenant wants to pay the rest of his rent

21 Replies

Alright BP, here's a question. I have a tenant that I recently placed in a Baltimore area home on a long term lease. Before the first month is up, he told me that due to an inheritance, he would like to pay the rest of his lease off in one lump sum. It sounds like a no-brainer, but what could be the possible drawbacks to accepting the rest of his rent at once?

The only thing I can think of is that you will be tempted to spend it straight away, rather than being responsible (and that WILL have "drawbacks")!  Cheers...

From the landlords perspective, in some states, you can accept prepaid rents but can not use the fund until the actual calendar month in which the rent would apply. Will your tenant be expecting a discount of some sort for paying the rents in advance?

I think it's a smart move on the tenants behalf to ensure he/she has a place to live for the term of the lease.

My suggestion would be to accept the prepaid rents & do your inspections to ensure that the tenant isnt' tearing the place up.

@Travis Paez I live in Crofton, work full time, and am a beginner as well. Do you know of a good investor's group in the area? I found a few on meetup.com but they seem "scammy."

Do you find it difficult to manage your property while working?

I won't take prepaid rent that isn't associated with the current tax year. Otherwise you will have a huge income this year and a loss next year. It messes up my reports too.

Other than verifying that you may legally accept a prepayment that far in advance, the only other obvious downside is a large prepayment may make it more difficult to evict the tenant if things should come to it.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

Hi! I live and work here in MD and the law says that landlords can not take deposits that amount to more than 2 months of rent. Further, many judges here in MD consider moneys that are received prior to the month that they are "earned" as a deposit. Therefore, there is a very fine line when accepting rents upfront.

While it sounds like a great deal, there could be some issues down the road if you took the lump sum. The tenant could have an issue 6 months down the road and get disgruntled if he feels it wasn't taken care of properly, and then that could snowball into him feeling like he got taken advantage of by paying his rent upfront which then could start a legal battle that you probably don't want to deal with. If you get a judge that considers your advanced rent payment as a deposit, then you could end up owing the tenant 3x the deposit overage plus attorney's fees. No fun! I always look at worst-case scenario and decide whether the possible negative outcomes outweigh the benefits, so that is what you will have to decide here :)

Wasn't that what was proposed in "Pacific Heights"?

I would get advice from a RE attorney and ask if it can be held in escrow.  I think that may avoid the tax implications and satisfy a judge if there was a question of whether it was a deposit or not.

Just thinking outside the box a little.

Originally posted by @Tom Potter :

I would get advice from a RE attorney and ask if it can be held in escrow.  I think that may avoid the tax implications and satisfy a judge if there was a question of whether it was a deposit or not.

Just thinking outside the box a little.

We have done this -  in our jurisdiction, we are not allowed to accept rent payment further in advance than the next after the current rental period - for an international student whose father wanted to pay the entire year's rent up-front.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

take the money.....possession, as they say, is 9/10ths of the law.

To weigh in again, Maryland laws are VERY tenant centered.  I don't think getting fined three times the monthly rent amount is worth taking the money.  Talk to an attorney before you do anything.

Time and time again books and experienced landlords say that paying rent in advance is a red flag. Watch the movie @Steve Babiak mentioned

If the tenant turns out to be horrible, you will not be able to evict for late rent. You will have to have an action for breach of lease which is much harder, more expensive and subjective.

As @Seth S. says "possession is 9/10ths of the law"  Unfortunately while you have possession of the cash your tenant has possession of your property. Which is worth more, your property or a years rent?  

Also as said above any payment in advance may be considered a deposit in MD.  This might violate deposit laws which would cost you triple the amount deemed deposit.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Ned Carey the tenant desires to pay this money in advance, the landlord isn't stealing it. Obviously, the tenant could attempt to break the lease at some point in the future before the term is up, and sure, if so, after expenses and additional months of rent owed for the vacancy during the term of the lease are kept could be owed a portion of that money back. Fair. However, if the landlord has the money already they no longer need to chase it if it is owed from a lease breaking tenant. If the tenant disagrees with any money returned after they break their lease, they are always free to sue for it. However, if you are referring to the 4 percent assigned to deposit money? None of this becomes a problem unless their is a problem. Again, the tenant desires to pay this rent money in advance. An agreement to accept this money negating any potential interest owed would more than likely remedy that issue should any court ask about it. But keep in mind, this is the tenant's desire, which the landlord is obliging. Personally, i would much rather already have the money than be chasing it in all circumstances.

@Ned Carey sorry, forgot,...there is zero chance that any landlord is liable for three times rent paid in advance under deposit law. That law regards not returning any deposit money owed in a timely manner back to a tenant. deposit law has nothing to do with accepting a year of rent in advance....of course, if any of that money ends up owed back to tenant after a tenant breaks the lease and a home is successfully re-rented and all expenses have been kept by landlord, then a landlord could be liable, otherwise...no.

Originally posted by @Seth S. :

Ned Carey the tenant desires to pay this money in advance, the landlord isn't stealing it. Obviously, the tenant could attempt to break the lease at some point in the future before the term is up, and sure, if so, after expenses and additional months of rent owed for the vacancy during the term of the lease are kept could be owed a portion of that money back. Fair. However, if the landlord has the money already they no longer need to chase it if it is owed from a lease breaking tenant. If the tenant disagrees with any money returned after they break their lease, they are always free to sue for it. However, if you are referring to the 4 percent assigned to deposit money? None of this becomes a problem unless their is a problem. Again, the tenant desires to pay this rent money in advance. An agreement to accept this money negating any potential interest owed would more than likely remedy that issue should any court ask about it. But keep in mind, this is the tenant's desire, which the landlord is obliging. Personally, i would much rather already have the money than be chasing it in all circumstances.

It's not a question of stealing the money.  Just because the tenant wants to pay and the landlord would love him to pay doesn't mean there is no risk of penalty, especially in this nanny state of Maryland or if the guy turns out to be a nut and he's tearing up the place or releasing roaches (Pacific Heights) and he's all paid up; you'd have a hard time getting him out.  I don't think it's worth the risk.  Do substantial due diligence up front, escrow it if allowed and move on.

@Tom Potter if a tenant is messing your house up, or violating other terms of the lease, the fact they have paid advance rent does not negate the ability to terminate said lease anymore than if they had paid nothing in advance. One has nothing to do with another. The only difference is that now the landlord has leverage to keep money for court costs and damages that they otherwise would be chasing from an evicted tenant. In my opinion, there is zero problem accepting this money in advance.

As a middle ground you might set up a completely separate bank account just to hold this tenants prepaid rent.  Only withdraw the money as the rent comes due and move it to your general account.  If a problem does arise it will at least be easy to account.  It also give you great leverage to avoid court all together.  If you have a problem with the tenant you can offer him his money back or some sort of other settlement to avoid legalities all together.

Do not touch any of the interest until the entire term of the lease is complete.  Or put it in a non interest bearing account.

If you do have to evict for other reasons at least you'll already have possession of the money which is the biggest problem with most tenants.  Collections is normally much more difficult than eviction.  

Thanks everyone for chiming in. Still waiting to hear back from our lawyer. I'll post back if our tenant actually tries to pay. In the meantime, I've suggested to him that it might be in his best interest to open an account just for that and set up an automatic payment. 

As far as tax reasons go, our accountant is confident that this can be labeled as deferred income and won't hurt our ledger or taxable income. 

Thanks again!

I would lean toward a suggestion similar to @Justin Pierce  .  Just to be safe....suggest to the tenant to open a totally separate account for this bulk rent payment.  This account could be one where either they could schedule automatic monthly payments to you, set it and forget it.  Or, one where you could automatically debit the monthly rent from said account.  Set it and forget it.